Short positions – how they work and when to use them
As often as price of stock, commodity, currency or index goes up in value, it goes down in value. Trading with CFD enables the trader to take advantage of these market events by the means of a short of Sell order. When you enter in to a short order, you are basically trading on the negative price trends of the underlying assets the CFD is related to. If you go short on oil for example, you will make a profitable trade if the price of oil goes down and reversely make a loss if the oil price goes up. The method of shorting a trade is one of the key differences between trading with CFD versus trading with the actual assets since it is impossible to make a profit on an actual asset that losses in value. To make a short sale for CFD in your CFD trading account is as easy as making a long order or Buy order in other terms (i.e. when you trading on positive price movements); just simply select the Sell order for the CFD in question on the instrument page for the CFD.
Now that we know what short positions are, let have a look at how to find and use them.
How you find suitable candidates for short positions
One way of finding CFD’s to short is to pay close attention to price and profit warnings for listed companies. These will be included in your trading news feed and is usually a good indication that a stock could fall in value and price. If you are trading commodities, you can find indications of falling commodity prices when governments or companies increase the supply of a specific commodity as the law of supply and demand states that an increase in supply and a decrease in demand equals falling prices. If you are trading with forex, government monetary, domestic and foreign policy becomes import as these are judged as positive or negative influences of the county’s currency against other currencies.
Use volatility to your advantage when short selling
As we all know, volatility means that the price of an assets moves up and down and the timing and amount of price movements creates the amount of volatility; sudden and large price movements creates high levels of volatility and vice versa. If you have your timing right and notice that an asset is currently undergoing a high level of volatility, you have time the Sell order to hit just when the price is going down and exit the trade when the price is going back up. A word of caution though, these types of trades needs to be monitored very carefully since changes in price happens fast in these types of volatile market conditions.
Using short orders as a mean of hedging
You can also you use short order when as mean of hedging other positions you hold in the CFD account. If your account holds a lot of Buy positions, you can use short orders to create a more balanced set of trades which potentially reduces the risk level amongst all your trades. As asset prices are sometimes interlinked, you can create very interesting synergies between short and long trades at the same time. An example of this would be when you are shorting oil the currency of some countries might go up in value. Finding these synergies is a excellent way of creating profitable trades in all market directions.
We hope that this article on short positions has given you the information you need. The next natural step is to use the free educational material and free demo account that our recommended CFD broker provides: